Jan 14 Measure What Matters

People are often surprised to hear about my first business, which I started when I was 12 years old.

One day, my friend and I watched another student bring a box Coke cans into the classroom. This student gave a can to each of his friends, and tried to put the box away. A few kids offered him some money for a can, which he reluctantly accepted. The prices got higher and higher until he sold out, keeping the last three for himself, having almost broken even. He didn’t think anything of it, and wasn’t keen to repeat the process.

We stood there in stunned silence, having watched this unfold over the course of two minutes, the lightbulbs above our heads growing increasingly brighter.

We fished an old bar fridge out of a nearby hard rubbish collection and cleaned it up, then bought a box of 30 cans of Pepsi. Total investment: $10.

The next day we sold the cans for $1 each, out of our newly acquired fridge, which we put in our homeroom. Total return: $30. We recouped our initial investment, and reinvested the $20 profit in another two boxes of cans. Thus, two entrepreneurs were born.

We had competition for the first two years, an existing tuck shop/canteen that was open at recess and lunch. As we initially presented no real threat, we focused on selling just one product, open 24/7 using the Honour System (leave the cash in the fridge). We also priced ourselves lower than the canteen, whose cans were going for an inconvenient $1.20.

We got bigger and bigger, becoming more sophisticated as we went along. This ran for six years, and became our passive income part-time jobs.

One of the most profound business lessons I’ve learned came from my dad. I needed a lift to the hardware store, to buy a padlock and hinges to lock up the fridge. We’d had some theft occur, and I took it personally. I reasoned that stealing Coke from my fridge was like stealing my lunch out of my backpack, and wasn’t going to stand for it.

My dad had a different view:

“How much work is it going to be for you to eliminate theft?”

“….a lot” I conceded.

“And how much work would it take for you to double your sales?”

“……………that’s not the point”

“Why not?”

I had no answer. The fact was, increasing sales was not only easier, it was substantially more valuable than tracking every single purchase to avoid losing income.

Percentage of cans paid for was the metric I tracked, and for the wrong reasons. It was a “Vanity Metric”, it felt more important than it actually was. The real metric to follow was Total profit per week. Such a small mental shift, and it revolutionized how we structured the business. Looking back later, we recognized that this was an inflection point in our profitability, and we were much better for it.

Now when I work with entrepreneurs on their business models, one of my favourite questions is: what metrics do you track? Which are most closely linked to your organisation’s success?

That’s not to say it’s easy to let go of the metrics that make us look good, but it’s important. UK Dragons’ Den star Theo Paphitis framed it memorably:

“Turnover is vanity, profit is sanity”

The key is to be honest, humble and objective, and the improvements will start to happen naturally. In the wise words of Peter Drucker: